Reinventing Manufacturing How the Transformation of Manufacturing Is Creating New Opportunity for California
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Reinventing Manufacturing How the Transformation of Manufacturing Is Creating New Opportunity for California April 2016 Acknowledgments About the Institute The Bay Area Council Economic Institute thanks the Since 1990, the Bay Area Council Economic Institute has content contributors and generous funders of this been the leading think tank focused on the economic project: A.T. Kearney; General Electric; Autodesk, Inc.; and policy issues facing the San Francisco/Silicon Val- Lawrence Livermore National Laboratory; Lawrence ley Bay Area, one of the most dynamic regions in the Berkeley National Laboratory; Siemens TTB; Jabil; United States and the world’s leading center for tech- Wendel, Rosen, Black & Dean LLP; University of nology and innovation. A valued forum for stakeholder California Office of the President; PARC, a Xerox engagement and a respected source of information and company; and Jones Lang LaSalle. fact-based analysis, the Institute is a trusted partner and adviser to both business leaders and government of- ficials. Through its economic and policy research and its many partnerships, the Institute addresses major factors The Institute is particularly appreciative of the support of impacting the competitiveness, economic development A.T. Kearney, which led the research and drafting of the and quality of life of the region and the state, including Major Drivers of Change section. infrastructure, globalization, science and technology, and health policy. It is guided by a Board of Trustees This project had many substantive contributors from the drawn from influential leaders in the corporate, academ- Bay Area Council Economic Institute: ic, non-profit, and government sectors. The Institute is Tracey Grose, Vice President housed at and supported by the Bay Area Council, a public policy organization that includes hundreds of the Sean Randolph, Senior Director region’s largest employers and is committed to keeping Pam Winter, Senior Advisor the Bay Area the world’s most competitive economy and Jeff Bellisario, Research Manager best place to live. The Institute also supports and man- Patrick Kallerman, Research Manager ages the Bay Area Science and Innovation Consortium Camila Mena, Research Analyst (BASIC), a partnership of Northern California’s leading scientific research laboratories and thinkers. Carolyn Garrett, Intern About BASIC External contributors provided their unique insights into the future of advanced manufacturing in California. The Bay Area Science and Innovation Consortium (BASIC) is an organization of the Bay Area’s leading Section 1 research and innovation companies and institutions, Hector Gutierrez and Patrick Van den Bossche, which together constitute the world’s greatest body of A.T. Kearney technology innovation capacity. Its participants include Insight Pages public and private universities, national laboratories, and leading private sector companies. BASIC’s mission is to Lothar Schubert, GE Digital advance the science, technology and innovation leader- Diego Tamburini, Autodesk, Inc. ship of the Bay Area, California and the nation. By bring- Lawrence Lee, Tolga Kurtoglu, and Janos Veres, ing together the university technologists, laboratory PARC, a Xerox company directors, CEOs and CTOs who lead the region’s world David Wahl and Charlie Thayer, Jabil renowned research organizations, this unique multi-sec- tor collaboration provides a platform through which the Kirk Klug, Siemens Industry, Inc., Mobility Division, Bay Area’s science and innovation community identifies Rolling Stock and addresses issues and opportunities impacting the Joshua Cohen, Wendel, Rosen, Black & Dean LLP region’s innovation leadership and its role as the world’s Greg Matter, Jones Lang LaSalle leading marketplace for ideas. Contents Executive Summary ...................................................1 Part One Part Two CHAPTER 1 California Manufacturing Major Drivers of Change ...........................................7 Regional Clusters Analysis ......................................68 Shifting Consumer Expectations ............................... 8 Los Angeles Area ..................................................... 68 Globalization ............................................................ 10 Bay Area ................................................................... 71 Technological Advances .......................................... 13 Orange County ........................................................ 74 New Productivity Levers .......................................... 18 Central Valley ........................................................... 76 Changing Workforce Dynamics ............................... 20 San Diego Area ........................................................ 78 Implications of the Manufacturing Revolution ......... 22 Central Coast ........................................................... 81 Sacramento Area ..................................................... 84 CHAPTER 2 California’s Shifting Landscape: Manufacturing Northern California .................................................. 87 and the Innovation Ecosystem ................................25 Growth Trends ......................................................... 26 Appendices Growth in the Recent Time Period, 2010–2014 ....... 28 Interviews ................................................................90 Growth in the Long Term, 1990–2014 ..................... 31 Methodology ...........................................................91 Manufacturing Wages in California ......................... 37 Regional Manufacturing Strengths .......................... 41 Tables & Notes California’s Innovation Ecosystem ........................... 44 California Manufacturing Patent Activity .......................................................... 47 Regional Clusters Tables .........................................92 Notes .....................................................................109 CHAPTER 3 Strengthening California’s Environment for Manufacturing ..............................51 Stimulate the Commercialization of Research and Development through Cluster-Based Strategies ..... 52 Grow the Talent Base for Advanced Manufacturing ................................... 57 Provide Access to Capital and Financial Incentives for Manufacturers ............. 60 Address the Cost of Doing Business in California for Manufacturers ................................ 63 California—with its diverse economy and history of innovation—is well positioned to capture future growth in many manufacturing sectors, but state and local governments will need more targeted policy tools to stimulate commercialization of new products, close the workforce gap, and incentivize more manufacturers to locate within the state. While the offshoring of production and automation technology have fundamentally transformed the industry, high-skilled manufacturing jobs are essential to a balanced, competitive economy. Today, advanced manufacturing techniques, the growing maker movement, and a renewed national interest in research and development have led to a reinvention of the manufacturing industry. Executive Summary Technology is revolutionizing manufacturing processes through innovations in 3D printing, robotics and big data (the Internet of Things)—often based on innovations that come from California. A range of factors, including rising labor costs in China, are leading some manufacturers to bring production home. California is in a good position to capture much of this growth, but needs policies that support and incentivize investment. Throughout much of the 20th century, the US economy was buoyed by the manufacturing sector, which pro- Major Drivers of Change vided a source of middle-income jobs and drove new Manufacturing is undergoing a major transformation. waves of innovation. Offshoring and recession have had These changes are creating both opportunities and major impacts on the sector, causing employment to competitive challenges comparable to those brought shrink. However, technological advances and shifting about by the invention of the steam engine and the global cost factors are now creating new opportunities Internet, and a third industrial revolution is already for domestic manufacturing. being triggered. Five forces in particular will impact California’s manufacturing sector. With more manufacturing jobs than any other state,1 California has a diverse manufacturing base. Its innova- Shifting Consumer Expectations: The rise of the tion ecosystem, which has led to links between manufac- Internet has created growing numbers of “con- turers and technology companies, makes it particularly nected consumers” and a world in which consumers well positioned to take advantage of a resurgent interest want customized services and products with shorter in domestic manufacturing. This is especially true for delivery times. From the way businesses interact products of an advanced technological nature and with customers to the high service level customers products that depend on custom design and rapid have come to expect, the relationship between users response to markets. and producers will become more engaged and will change the product and service innovation process. Due to technological change, which has reduced the number of workers required for most production Globalization: As wages rise, China is losing its status processes, this manufacturing renaissance is unlikely as the low-cost manufacturing country of choice, to generate jobs at the high